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Brazilian airline agrees to $41 million FCPA settlement

Financial Crimes FCPA SEC DOJ Enforcement Of Interest to Non-US Persons Brazil Bribery

Financial Crimes

On September 15, a São Paulo-based domestic airline agreed to pay over $41 million to resolve parallel civil and criminal investigations by the SEC and DOJ. The investigations related to a bribery scheme executed by the airline to secure favorable payroll tax and fuel tax treatment through two pieces of new legislation. At the time of the conduct, the airline was the largest air transportation and travel services group in Brazil and its shares traded on the New York Stock Exchange. The favorable tax treatment provided the airline, along with all other Brazilian airlines, reduced taxes and expenses.

According to the SEC and DOJ, a member of the airline’s Board of Directors (the “Director”) orchestrated the scheme, meeting and communicating with Brazilian officials and politicians and their close associates on numerous occasions. At one point, the Director communicated with a close associate of a Brazilian official who, “in turn, discussed the bribe schemes . . . with the Brazilian Official . . . via an ephemeral messaging application that uses end-to-end encrypted and content-expiring messages.” The servers of this messaging application were exclusively located in the United States (one the jurisdictional hooks relied on by the government).

The Director ultimately authorized and directed the bribe payments from the airline to officials, and payments were made both directly from the airline and from companies controlled by the Director to various companies controlled by Brazilian officials or their close associates. Some of the intermediary companies receiving the corrupt payments were based in the U.S. and some of the payments were transmitted through a U.S. correspondent bank. The payments made directly by the airline were authorized from the Director’s own “Cost Center,” which had been created under the airline’s legal department and over which the Director had full discretion with no clearly defined controls or limits. The payments were inaccurately recorded in the airline’s books and records as payments to various third-party vendors for services that were never actually rendered. The airline did not have an effective review process of the documentation submitted before or after the disbursement of funds to monitor whether the invoices were authentic or whether the payments were for bona fide expenditures.

As a result of this conduct, the SEC and DOJ determined that the airline violated the anti-bribery provisions, the books and records provisions, and the internal controls provisions of the FCPA.

To resolve the civil charges, the airline agreed to a cease-and-desist order, disgorgement and pre-judgment interest totaling $70 million, although all but $24.5 million was waived based upon the airline’s present financial condition.

To resolve the criminal charges, the airline entered into a deferred prosecution agreement (DPA). The original criminal penalty was calculated to be $87 million but was reduced to $17 million in light of the airline’s financial condition. In calculating the penalty, the DOJ acknowledged full credit for the airline’s cooperation, despite the fact that the airline did not self-report the violations. The DOJ also considered the airline’s remedial measures, which included terminating the Director at issue and relationships with all third-party vendors involved in the underlying misconduct, and a complete overhaul of its compliance program. However, the DPA did not require the appointment of a corporate compliance monitor.

The DOJ and SEC each agreed to offset $1.7 million in penalties the airline is expected to pay to resolve the parallel Brazilian proceedings against their respective resolutions.